Online Pricing: The Dilemma before Electronics Brands

Updated: May 19, 2014, 02.04 PM IST

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The contentious issue is, the pricing of products by online retailers, which are offering huge discounts to consumers.

By Shyamanuja Das

If they do not keep up with the times, someone else will. Maybe, that someone is already here. Ironic it may sound; but even as electronic products have emerged as the top selling category in Indian retail e-commerce, the top electronic brands are engaged in a proxy battle with the online retailers, ostensibly on behalf of the brick-and-mortar retailers and distributors. The contentious issue is, of course, the pricing of products by online retailers, which are offering huge discounts to consumers. The offline retailers are finding it difficult to compete and the OEMs are taking on the e-tailers on their behalf.

But the difference in approaches of two sets of OEMs is hard to miss.

The first group, for whom consumers are just one of the target segments-such as Lenovo, Toshiba, and even Canon-has come out in the open with war cry against e-tailers. Some of them have issued advisories to consumers saying they may not be getting warranty and services while buying from online retailers. Many have even warned consumers of the possibility of ending up with fake products.

The other group, consisting mostly of consumer focused brands (read phone makers) like Samsung, Apple and Nokia, is far more measured in its approach. These brands understand the criticality of online channels and selling and strengthening their brand through those channels and hence have preferred the path of discussion and negotiations with them, without coming out in the open.

Yet, they also seem to be worried about the phenomenon. The Economic Times reported some time back that senior official of the top three phone makers met to discuss the issue, even as they keep fighting fiercely in the market place. That itself is a good pointer to how serious the issue has become for them. As the article rightly points out, it is similar to the situation which united the book trade in the US when it faced the Amazon challenge.

One up in Pricing

But what enables the e-tailers to offer such huge discount? Part of the reason-and this also happens to be the more politically correct part to quote in this big debate-is the inherent efficiency of their model. With no brick and mortar stores in prime real estate, their overheads are low. This, coupled with tight supply chains with little inventory, make them more efficient.

The other, that cannot be ignored, is the scale. Many of them such as WS Retail-the retail arm of Flipkart-have a much larger scale, say in selling mobile phones, than any of the offline stores, modern or traditional. That allows them to be aggressive on margins.

But is that all? Come to India, circa 2013-14 and you have the harsh reality-harsh for offline retailers, that is. Unlike them, many of the large online retailers are backed by huge VC money. Offline retailers accuse that they use part of that money to buy market share-by offering huge discounts. The accusation is not entirely untrue, though it may not explain the entire phenomenon.

Actually, it is a combination of all three; and possibly more.

One of the factors-and which is the official line taken by the sites like Flipkart, Amazon, and Snapdeal-is the marketplace model. These sites maintain that being neutral marketplaces, they do not have any control over end-user pricing, as that is decided by the numerous retailers who sell on their platforms. However gamesman-like it seems, the claim is factually correct. Of course, they vehemently deny the accusation by some OEMs that fake products get sold on their platforms. Many of the sellers, it must be pointed out, are small time offline retailers who see online as yet another inexpensive new channel to sell their products.

To the uninitiated, it must be mentioned that the marketplace model which has emerged as the default model in India for retail e-commerce, has less to do with any inherent strength in the model and more to do with FDI regulations, which stipulates no FDI in retail (B2C) e-commerce. Most e-tailers changed to the marketplace model to comply with this marketplace, where they do not sell directly to the end users.

The brand at stake...

While for the IT OEMs such as Lenovo, Dell and Toshiba, the battle is all about protecting their long time loyal offline partners, for consumer brands like Samsung and Nokia, it is also a question of brand dilution, to be sold at such heavy discounts. At the same time, they also do not want to be seen by consumers as fighting with the channels (online retailers) against something that is clearly in consumer's favor-low prices. In the day of Twitter/Facebook consumer activism, it could even do significant damage to their brand perception.

Instead of coming out with aggressive, sometimes unsubstantiated statements, the OEMs must be seen to be acting in a fair manner that is in the interest of the consumers. Some of the questions that they need to examine and answer to themselves, consumers and the community at large is as follows.

How are the advisories that they have issued urging the consumers not to buy from online sites in the interest of consumers? Why should they withdraw the warranty that is offered with the products, whether it is from online or offline channels? Is it legal to do so? Why should they make the consumer suffer? They may probably offer additional warranty if consumers buy the products from offline stores. But how and why should they withdraw the basic warranty? Can they substantiate the claim that some online channels are selling fake or smuggled products? If they can, they must come out in public with specifics and, with the help of legal system, must take strong action against the erring sellers. This will establish their credibility. The failure to do so will put serious question marks on their credibility. They must seriously examine if online retailers are doing any price cutting using VC money to buy market share, as many offline retailers accuse. If the e-tailers are resorting to any unfair means of competition and violating any provisions of The Competition Act 20002, they must be dealt with using the law of the land. In any case, it is not a single player who is using its market power or staying power; it is a large set of players which are accused of buying market share.

The future is already here

But more than just fairness and long term brand dilution fears, the top phone makers have a bigger challenge at hand-something that regional middle level managers can be made to appreciate much better-market share.

Many executives in the consumer electronics companies-especially phone makers-admit that it is a choice between the present and future. They have no doubt that online is here to stay and is increasingly going to take away market share. The question that they are really struggling with is: how far is tipping point? But big changes seldom happen without a disruptive challenger. A new challenger has no legacy and hence pushes the new, more efficient model to create an advantage in its favor.

That may already be happening-ironically spearheaded by a company, which is the oldest mobile phone company in the world, though now starting almost afresh. Motrola Mobility, now owned by Gooogle, and now the challenger in the mobile phone market, has probably taken the most decisive step in this direction. It has chosen to sell its newly released Moto series of phones in India exclusively through Flipkart, India's biggest online retailer-ironically, at a time when other electronic brands are fighting a turf battle with the online retailers.

It is not an entirely new strategy though. Others have tried out similar strategy. Noted among them is Nokia, which tried it out in China. It had signed a deal in December 2012 with second largest Chinese e-tailer 360buy.com (now JingDong) whereby the latter agreed to procure 2 billion yuan ($320 million) worth of mobile phones in one year.

The change is already happening. The choice before the brands is between accepting it gracefully versus accepting it bitterly.

Trying to stop an idea whose time has come is unfair and is against the spirit of competition. Ultimately, it is against the interest of customers. It is like forcing metro rail services to increase their fares because private bus services are getting impacted.

Why should globally respected brands be indulging in something like that?

(Shyamanuja Das is Director & Head, Business Research at JuxtConsult. The views published here are his own and does not reflect that of the company)